Portfolio Theory and Performance Analysis

Portfolio Theory and Performance Analysis......Page 4
Contents......Page 8
Acknowledgements......Page 14
Biographies......Page 16
Introduction......Page 18
1.1.1 Presentation of the different traditional asset classes......Page 20
1.1.2 Alternative instruments......Page 22
1.2.1 Passive investment management......Page 23
1.3 Organisation of portfolio management and description of the investment management process......Page 25
1.3.2 The multi-style approach......Page 26
1.3.3 Performance analysis......Page 27
1.4.1 Market efficiency......Page 29
1.4.2 Performance persistence......Page 30
1.5 Performance analysis and the AIMR standards......Page 33
1.6 International investment: additional elements to be taken into account......Page 37
Bibliography......Page 39
2.1.1 Return on an asset......Page 42
2.1.2 Portfolio return......Page 44
2.1.3 International investment......Page 50
2.1.4 Handling derivative instruments......Page 55
2.1.5 The AIMR standards for calculating returns......Page 57
2.2.1 Benchmarks......Page 60
2.2.2. Peer groups......Page 66
2.2.3. A new approach: Portfolio Opportunity Distributions......Page 67
2.3 Definition of risk......Page 68
2.3.1 Asset risk......Page 69
2.3.3 Other statistical measures of risk......Page 71
2.3.5 Foreign asset risk......Page 72
2.3.7 Generalisation of the notion of risk: Value-at-Risk......Page 74
2.4.1 Use of time-series......Page 80
2.4.3 Forecast evaluation......Page 81
Appendix 2.1 Calculating the portfolio return with the help of arithmetic and logarithmic asset returns......Page 83
Appendix 2.2 Calculating the continuous geometric rate of return for the portfolio......Page 84
Appendix 2.3 Stock exchange indices......Page 85
Bibliography......Page 91
3.1 Principles......Page 94
3.1.2 Risk aversion......Page 95
3.2 The Markowitz model......Page 97
3.2.1 Formulation of the model......Page 98
3.2.2 Choosing a particular portfolio on the efficient frontier......Page 99
3.2.4 International diversification and currency risk......Page 100
3.3.1 The Markowitz–Sharpe critical line algorithm......Page 101
3.4.1 Sharpe’s single-index model......Page 102
3.4.2 Multi-index models......Page 104
3.4.3 Simplified methods proposed by Elton and Gruber......Page 105
3.5 Conclusion......Page 106
Appendix 3.1 Resolution of the Markowitz problem......Page 107
Bibliography......Page 110
4.1.1 Context in which the model was developed......Page 112
4.1.2 Presentation of the CAPM......Page 115
4.1.3 Modified versions of the CAPM......Page 119
4.1.4 Conclusion......Page 124
4.2.1 The Treynor measure......Page 125
4.2.2 The Sharpe measure......Page 126
4.2.4 Relationships between the different indicators and use of the indicators......Page 127
4.2.5 Extensions to the Jensen measure......Page 129
4.2.7 The information ratio......Page 131
4.2.8 The Sortino ratio......Page 132
4.2.9 Recently developed risk-adjusted return measures......Page 133
4.3 Evaluating the management strategy with the help of models derived from the CAPM: timing analysis......Page 140
4.3.2 The Henriksson and Merton (1981) and Henriksson (1984) models......Page 141
4.3.3 Decomposition of the Jensen measure and evaluation of timing......Page 142
4.4 Measuring the performance of internationally diversified portfolios: extensions to the CAPM......Page 144
4.4.2 McDonald’s model......Page 145
4.5.1 Roll’s criticism......Page 146
Bibliography......Page 147
5.1.1 Presentation of the ARCH models......Page 152
5.1.2 Formulation of the model for several assets......Page 154
5.2.1 The model......Page 157
5.2.2 Application to performance measurement......Page 159
5.2.3 Model with a conditional alpha......Page 161
5.3.1 The Cornell measure......Page 162
5.3.2 The Grinblatt and Titman measure and the positive period weighting measure......Page 163
5.3.3 Performance measure based on the composition of the portfolio: Grinblatt and Titman study......Page 164
Bibliography......Page 165
6.1.1 Arbitrage models......Page 166
6.1.2 Empirical models......Page 168
6.2 Choosing the factors and estimating the model parameters......Page 169
6.2.1 Explicit factor models......Page 170
6.2.2 Implicit or endogenous factor models......Page 176
6.2.3 Comparing the different models......Page 182
6.3.1 The international arbitrage models......Page 183
6.3.2 Factors that explain international returns......Page 186
6.4 Applying multi-factor models......Page 187
6.4.1 Portfolio risk analysis......Page 188
6.4.3 Decomposing the performance of a portfolio......Page 192
6.4.5 Style analysis......Page 196
6.5 Summary and conclusion......Page 206
Appendix 6.1 The principle of arbitrage valuation......Page 207
Bibliography......Page 209
7.1.1 Asset allocation......Page 212
7.2.1 Fama’s decomposition......Page 227
7.2.2 Performance decomposition corresponding to the stages in the investment management process......Page 230
7.2.3 Technique of replicating portfolios for performance measurement......Page 239
Bibliography......Page 240
8.1.1 Yield to maturity and zero-coupon rates......Page 246
8.1.2 Estimating the range of zero-coupon rates from the range of yields to maturity......Page 247
8.1.3 Dynamic interest rate models......Page 249
8.2.1 Quantitative analysis of bond portfolios......Page 251
8.2.2 Defining the risks......Page 252
8.2.3 Factor models for explaining yield curve shifts......Page 253
8.2.4 Optimising a bond portfolio......Page 255
8.2.5 Bond investment strategies......Page 256
8.3 Performance analysis for fixed income security portfolios......Page 257
8.3.2 The Lehman Brothers performance attribution model......Page 258
8.3.3 Additive decomposition of a fixed income portfolio’s performance......Page 260
8.3.4 International Performance Analysis (IPA)......Page 261
8.3.5 Performance decomposition in line with the stages in the investment management process......Page 262
8.3.6 Performance decomposition for multiple currency portfolios......Page 264
8.3.7 The APT model applied to fixed income security portfolios......Page 265
8.3.8 The Khoury, Veilleux and Viau model......Page 266
8.3.9 The Barra model for fixed income security portfolios......Page 267
Bibliography......Page 268
Conclusion......Page 270
Index......Page 272